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Cross-sectional Tobin's Q

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  • Frederico Belo
  • Chen Xue
  • Lu Zhang
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Abstract

The neoclassical investment model matches cross-sectional asset prices both in first differences and in levels. With ten book-to-market deciles as the testing portfolios, the investment model largely matches the Tobin’s Q spread and the average return spread across the extreme deciles. The parameter estimates imply low adjustment costs around 1.7% of sales. The model’s fit results from three aspects of our econometric strategy: (i) We test the model at the portfolio level to alleviate the impact of measurement errors; (ii) we match the first moment to mitigate the impact of temporal misalignment between asset prices and investment; and (iii) we allow for nonlinear marginal costs of investment. Our evidence suggests that any differences between the intrinsic value of equity and the market value of equity tend to dissipate in the long run.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16336.

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Date of creation: Sep 2010
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Handle: RePEc:nbr:nberwo:16336

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  1. Frederico Belo & Xiaoji Lin & Santiago Bazdresch, 2014. "Labor Hiring, Investment, and Stock Return Predictability in the Cross Section," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 129 - 177.
  2. Lu Zhang, 2005. "The Value Premium," Journal of Finance, American Finance Association, vol. 60(1), pages 67-103, 02.
  3. Lorenzo Garlappi & Hong Yan, 2011. "Financial Distress and the Cross‐section of Equity Returns," Journal of Finance, American Finance Association, vol. 66(3), pages 789-822, 06.
  4. Monika Merz & Eran Yashiv, 2005. "Labor and the Market Value of the Firm," CEP Discussion Papers dp0690, Centre for Economic Performance, LSE.
  5. Lubos Pastor & Pietro Veronesi, 2002. "Stock Valuation and Learning about Profitability," NBER Working Papers 8991, National Bureau of Economic Research, Inc.
  6. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2003. "The Value Spread," Journal of Finance, American Finance Association, vol. 58(2), pages 609-642, 04.
  7. Laura Xiaolei Liu & Toni M. Whited & Lu Zhang, 2009. "Investment-Based Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 117(6), pages 1105-1139, December.
  8. Rui Albuquerque & Neng Wang, 2007. "Agency Conflicts, Investment, and Asset Pricing," NBER Working Papers 13251, National Bureau of Economic Research, Inc.
  9. Peter M. Demarzo & Michael J. Fishman & Zhiguo He & Neng Wang, 2012. "Dynamic Agency and the q Theory of Investment," Journal of Finance, American Finance Association, vol. 67(6), pages 2295-2340, December.
  10. Pastor, Lubos & Veronesi, Pietro, 2006. "Was there a Nasdaq bubble in the late 1990s?," Journal of Financial Economics, Elsevier, vol. 81(1), pages 61-100, July.
  11. Joao Gomes & Amir Yaron & Lu Zhang, 2002. "Asset Pricing Implications of Firms' Financing Constraints," NBER Working Papers 9365, National Bureau of Economic Research, Inc.
  12. Luboš Pástor & Pietro Veronesi, 2009. "Technological Revolutions and Stock Prices," American Economic Review, American Economic Association, vol. 99(4), pages 1451-83, September.
  13. Dmitry Livdan & Horacio Sapriza & Lu Zhang, 2009. "Financially Constrained Stock Returns," Journal of Finance, American Finance Association, vol. 64(4), pages 1827-1862, 08.
  14. Ilya A. Strebulaev, 2004. "Do Tests of Capital Structure Theory Mean What They Say?," Econometric Society 2004 North American Summer Meetings 646, Econometric Society.
  15. Urban J. Jermann, 2005. "The Equity Premium Implied by Production," 2005 Meeting Papers 630, Society for Economic Dynamics.
  16. Joao Gomes & Leonid Kogan & Lu Zhang, 2003. "Equilibrium Cross Section of Returns," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 693-732, August.
  17. Patrick Bolton & Hui Chen & Neng Wang, 2011. "A Unified Theory of Tobin's q, Corporate Investment, Financing, and Risk Management," Journal of Finance, American Finance Association, vol. 66(5), pages 1545-1578, October.
  18. Jin Ginger Wu & Lu Zhang & X. Frank Zhang, 2007. "Understanding the Accrual Anomaly," NBER Working Papers 13525, National Bureau of Economic Research, Inc.
  19. Frankel, Richard & Lee, Charles M. C., 1998. "Accounting valuation, market expectation, and cross-sectional stock returns," Journal of Accounting and Economics, Elsevier, vol. 25(3), pages 283-319, June.
  20. Evgeny Lyandres & Le Sun & Lu Zhang, 2008. "The New Issues Puzzle: Testing the Investment-Based Explanation," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2825-2855, November.
  21. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-52, September.
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